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Morningstar | Corporate Action: Take Up Entitlements as Cromwell Slightly Deleverages

Cromwell Property Group is undertaking a 2-for-3 non-renounceable entitlement offer to raise up to AUD 300 million at AUD 0.98 per security. Of this, AUD 210 million is already underwritten by major security holders. Depending on the participation of retail investors, pro forma gearing reduces from 37% to between 30% and 33%. Cromwell reaffirmed fiscal 2019 earnings guidance for earnings of at least AUD 8.0 cents per security, or cps, and distributions of at least AUD 7.25 cps.

Even though the entitlement offer price is not an especially compelling offer, we recommend eligible investors take up their entitlements. First, the offer price is at a discount to the recent trading range of Cromwell, with Cromwell trading above AUD 1.00 for all but a few weeks of 2018. Second, the raising is a minor positive for the capital structure of Cromwell, reducing look-through gearing from 43% to between 38% and 40% on a pro forma basis. We continue to prefer more conservative leverage settings, closer to 30%.

We continue to view Cromwell as higher risk than most Australian property stocks under coverage. The higher risk evolves from the lower quality of the assets owned by Cromwell directly and indirectly through its coinvestment in funds. Economic conditions have been systematically strengthening over the past decade in most geographies, contributing to solid occupancy levels and rent growth. The risk lies in a period of economic contraction, a situation where we expect Cromwell’s tier 2 properties will underperform properties in more desirable locations with deeper demand pools. Conversely, if economic conditions remain robust for an extended period, Cromwell would be able to renew leases without having to pay exorbitant tenant incentives. A period of sustained economic growth will also provide a tailwind for Cromwell to continue growing its property fund management business.

The proceeds of Cromwell’s raising will be used to reduce gearing and fund Cromwell Property Group’s further investment of AUD 124 million in the Cromwell European Real Estate Investment Trust, or CEREIT. Cromwell has a 35% stake in CEREIT, which plans on spending up to AUD 600 million buying a further 23 office, logistics, and industrial properties in Poland, Finland, the Netherlands, Italy, and France.